Is peso volatility here to stay?

Delia Paredes & Genevieve Signoret

(Hay una versión en español de este artículo aquí.)

In our March edition of Quarterly Outlook, we anticipated that the peso would, as in past electoral cycles, depreciate significantly against the dollar in the weeks leading to Election Day. And indeed, 30 days before the election, the Mexican peso is now trading around 17.00 pesos per dollar, having reached a minimum of 16.45 in early April.

Could electoral uncertainty be depressing the exchange rate? Is the pattern observed in the last four elections recurring?

We think not. In our view, the exchange rate is simply responding to the international volatility being driven by two factors:

1. An adjustment of expectations as to the initial date of Fed rate cuts. Inflation has proved higher than expected. Consequently, the Fed is now expected to push out the start its rate-cutting cycle from June to November. Some analysts, in fact, even see no rate cut at all happening this year.
2. A jump in geopolitical risk. Risk aversion spiked globally owing to a rise in tensions in the Middle East that strengthened the dollar not only against the peso but also against other currencies.

The Mexican peso is following its usual pattern this electoral cycle, but electoral uncertainty seems not to be the reason

Exchange rate (index t-180=100)

Source: Bloomberg.